DiamondRock Hospitality Company (DRH) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the DiamondRock Hospitality Company’s Second Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s presentation, Mr. Sean Kensil. Sir, please begin.

Thank you, Howard. Good morning, everyone, and welcome to DiamondRock's second quarter 2017 earnings call and webcast. Before we begin, I would like to remind participants that many of our comments today are considered forward-looking statements under federal securities law, and may not be historical facts. They may not be updated in the future. These statements are subject to risks and uncertainties as described in the Company's SEC filings. In addition, as management discusses certain non-GAAP financial measures, it may be helpful to review the reconciliations to GAAP set forth in our earnings press release. With me on today's call is Mark Brugger, our President and Chief Executive Officer; Sean Mahoney, our Chief Financial Officer; Tom Healy, our Chief Operating Officer; and Troy Furbay, our Chief Investment Officer. This morning, Mark will provide a brief overview of our second quarter results, as well as the company's updated outlook for 2017. Sean will then provide greater detail on our second quarter performance and discuss our balance sheet. Following their remarks, we will open the line for questions. With that, I am pleased to turn the call over to Mark.

Good morning, everyone, and thank you for joining us for DiamondRock's second quarter earnings call. We are very pleased with the second quarter results and ability to raise full year guidance. We are raising full year RevPAR guidance by 200 basis points on the bottom-end and 100 basis points on the top-end. Before getting into details on our results, I will open with a few brief observations on the economy and lodging fundamentals. The major economic indicators that have historically correlated with lodging demand, particularly unemployment rates, consumer sentiment and non-residential corporate investments remain pretty solid. Corporate profits are increasing for the fourth consecutive quarter and GDP growth in the quarter was 2.6%, accelerating from 1.4% in the first quarter. Lodging indicators were stable in the second quarter and RevPAR grew respectable 2.7% for the industry. Growth slightly decelerated from the first quarter as the Easter shift impacted Group business. For the quarter, demand was decent and increased 2.3%, which outpaced supply growth by about 50 basis points. Consistent with our expectations, RevPAR for the top 25 markets continued to underperform by just over 100 basis points as the most desirable gateway markets had to cope with more hotel supply than the national average. As we look out, there is a more optimistic case to be constructed on the demand side as corporate balance sheets are in excellent shape and corporate investment has increased. Pro growth policy changes such as corporate tax reform are enacted, it is likely that GDP will accelerate and transit demand along with it. With that said, we have not yet seen signs of improving demand. Let’s now turn to DiamondRock’s results. DiamondRock’s portfolio delivered second quarter results that were ahead of internal expectations. Portfolio RevPAR grew 2%, which outperformed both the top-25 markets and upper up-scale segment. The stronger results were powered by exceptional growth at our two recent acquisitions in Sedona, a strong Boston market and outperformance in St. Thomas, Vail and Salt Lake City. Performance at our New York City hotels also exceeded our expectations with positive RevPAR growth. These collective good results were partially offset by headwinds at two our Saltford hotels and our San Francisco Bay Area hotels. House profit margins were good at 45% and hotel adjusted EBITDA margins were 34.6%. EBITDA margins were materially impacted by some lumpy property tax increases that hit in the quarter. Sean will get into details on that in a minute. Excluding the property tax increases, second quarter operating costs were essentially flat and up only one half of 1% year-to-date. We believe that that is a terrific result and a testament to the skills of our asset management team and operators at our hotels. However, success is never final. The asset management team continues to look at unique ways to improve margins and increase efficiencies within our portfolio. Three large areas of focus are labor, food cost, and energy. For example, on energy, we are getting ready to implement a program to upgrade to LED lighting across the portfolio. When complete, this will generate over $1 million in energy cost savings and a double-digit IRR. Initiatives like this gives us confidence that we can continue to mine value and increase efficiencies at our hotels even in a modest demand growth environment. We wanted to provide an update on renovation activity. DiamondRock continues to invest prudently in our existing portfolio for return on investment repositioning and to remain competitive. We completed six significant renovation projects during the first half of 2017 including major rooms renovations at the Historic District Charleston Renaissance, Kimpton, Huntington Beach, the Luxury Collection Gwen, The Lodge at Sonoma and the Worthington Renaissance. We also completed the third phase of the $110 million Chicago Marriot renovation. These renovations are expected to better position our hotels to increase market share and drive long-term value. We completed all projects by April and our portfolio gained 30 basis points of market share in the second quarter. Moreover, we expect these hotels to outperform for the balance of the year and in 2018. Turning to acquisitions. In the first quarter, we closed on the $97 million acquisition of the L'Auberge de Sedona and Orchards Inn Sedona. These assets are performing ahead of underwriting with combined RevPAR growth of 23% and nearly 500 basis points of EBITDA margin expansion in the second quarter. Moreover, there is still significant additional growth potential at this resort complex and we are refining our long-term plan. Obviously, we are really happy about these deals. Looking back over recent acquisitions, we have been focused on resorts. In fact, our last six acquisitions have been resorts and we believe that this is a smart place to allocate capital now given demand trends and long-term supply constraints. The Westin Fort Lauderdale Beach Resort is above underwritings by some softness in that market, our investment is tracking under a ten times EBITDA multiple. Our combined Key West acquisitions have an attractive basis of under $500,000 per key. The Sheraton Key West resort has performed well and is tracking under 11 times EBITDA multiple on our investment and has a significant value-add component we have yet to deploy. Our smallest deal, the Inn at Key West has faced some transitory supply challenges, but we planned to reposition that resort next year and continue to believe that Key West is one of the best long-term markets in the U.S. Finally, our Kimpton Huntington Beach Resort has recently completed renovation and an ROI restaurant reconcepting that should allow it to outperform going forward. In terms of new deals, the acquisition environment remains difficult, while we continue to look for acquisition opportunities that create value; there are simply too many active buyers for institutional quality deals. For fully auction deals, the final pricing has generally exceeded our underwriting – underwritten values by 10% to 15%. Given this market dynamic, we are focusing on generating off-market transactions and are optimistic we will find more value-add deals similar to Sedona. But if not, we are purportedly content to maintain excess investment capacity at this point in the cycle. Before providing our outlook, let me turn the call over to Sean for more details on our second quarter results and our balance sheet. Sean?

Thanks, Mark. Before discussing our second quarter results, please note comparable RevPAR, hotel adjusted EBITDA margin and other portfolio statistics include the Orchards Inn and L'Auberge de Sedona, and exclude the three hotels sold last year for all periods presented. Our hotels performed ahead of expectations and gained market share during the second quarter. Second quarter comparable RevPAR grew 2%. April’s RevPAR growth of 0.6% was negatively impacted by the timing of Easter. RevPAR growth was 4.1% in May, and 1.3% in June. Our asset management initiatives drove a 38% profit flow-through in the quarter. Overall, it was the combined efforts of our asset managers and our operators in implementing tight cost controls that enabled the hotels to limit total hotel operating expenses growth to 0.4% excluding property taxes. As Mark mentioned, property taxes materially impacted hotel adjusted EBITDA margin by 147 basis points. Excluding property taxes, second quarter hotel adjusted EBITDA margins expanded by 51 basis points. The increases in property taxes were mostly attributable to our hotels in Chicago, and Colorado. The increase of $3.7 million was driven by a $1.8 million credit recorded after last year’s successful tax appeals in Chicago, as well as $1.9 million in higher tax assessments in Chicago and Colorado where the assessment is under appeal. Second quarter food and beverage profit margins outperformed expectations again. We achieved flat profit margins on a 0.5% decline in revenue. For the year-to-date period ended June 30, the company reported comparable RevPAR growth of 2% and hotel adjusted EBITDA margin contraction of 50 basis points. Excluding property taxes, year-to-date hotel adjusted EBITDA margins expanded approximately 40 basis points. Additionally, I am pleased to report that the third quarter started off well with July RevPAR growth of 3.8%. Let me spend a couple of minutes discussing trends in our three significant segments. Our Business Transient segment was the primary driver of our portfolio exceeding expectations during the quarter. Business Transient revenues, which represent over 37% of room revenues increased 5.6%. This was primarily driven by a 4.2% increase in demand, and 1.4% higher average daily rates. Second quarter leisure contracts and other revenues which represented 34% of total room revenues increased 0.2%. The slight increase was impacted by the implementation of revenue management strategies to mix shift into higher rated Business Transient segment which generated a rate premium of approximately $55. The Group segment, which represented 29% of room revenues in the quarter performed in line with expectations. Group was negatively impacted by the timing of Easter in April quarter resulting in second quarter Group revenue increasing 0.2%. Short-term pick up was encouraging with $3.7 million of in the quarter, for the quarter business booked, which represents a 5% increase from prior year. There are a few other Group trends worth noting. As expected, our 2017 Group pace moderated from last quarter with pace now up 0.5% compared to 2.1% last quarter. Although our in the quarter, for the quarter bookings were higher than last year, we booked approximately 14% less third and fourth quarter Group revenues compared to the same time last year. This was anticipated and our guidance assumes that this trend continues throughout the year. The Group layout for the balance of 2017 which is influenced by the timing of citywide in our markets shows Group revenue to be slightly positive during the third quarter and flat during the fourth quarter. Finally, we are confident in our full year Group pace as we currently have approximately 93% of forecasted Group revenues on the books. Looking forward, our 2018 Group pace remains positive with approximately 53% of the expected Group business already booked. Our 2018 Group pace is currently stronger in the first half of the year with pace up over 3% led by both of our hotels in Chicago and Frenchman's Reef. Our pace moderates in the back half of 2018, but there is still a lot of time left to book business during these time periods. Turning back to the second quarter, I want to make a few comments on a few of our significant markets. RevPAR at our four New York City hotels increased 0.4%, which outpaced the Manhattan market by a 100 basis points. The Lexington Hotel was the primary driver of our New York outperformance and exceeded hotel adjusted EBITDA expectations by over $1 million. Our two hotels in Boston benefited from strong citywides in May and the favorable timing of the Boston Marathon over a traditionally slow Easter weekend. Our Chicago hotels performed in line with expectations. However, we continue to expect the Gwen to outperform Chicago, and national averages. Gwen’s Group pace is up over 15% for the back half of the year. The Salt Lake City Marriott continued to outperform with second quarter and year-to-date RevPAR growth of 14.7% and 17.6%. We are experiencing some challenge in Florida markets. The Fort Lauderdale West Inn is underperforming due to the impact of two recently renovated Fort Lauderdale hotels coming back in inventory and Miami regaining some lost share from diminished weekend concerns. In addition, The Inn at Key West underperformed our expectations as the hotel continues to be negatively impacted by the reintroduction of four hotels into the market. Before turning the call back over to Mark, I would like to touch on our balance sheet. We continue to position our capital structure to maintain liquidity and build capacity in order to allow the company to be opportunistic. During the second quarter, we addressed our only 2017 maturity by completing a new $200 million unsecured term loan. This loan further strengthened our balance sheet, reduced borrowing costs, extended our debt maturity schedule and provided additional investment capacity. Our balance sheet continues to be in great shape. The weighted average interest rate on our debt is only 3.7%. We have no near-term debt maturities with our next maturity in 2020. Our average mortgage maturity is nearly six years, 20 of our 28 hotels are unencumbered. Our forecasted 2017 net debt-to-EBITDA is approximately three times and we currently maintained over $350 million of balance sheet capacity including an undrawn $300 million line of credit and approximately $150 million of corporate cash. I will now turn the call back over to Mark. Mark?

Thanks, Sean. I’ll now turn to our full year outlook. Last night, we were pleased to raise both our full year RevPAR and adjusted EBITDA guidance. This increase reflects our strong performance during the first half of the year, our conviction in stable fundamentals, and our favorable geographic footprint for the remainder of the year. Our updated 2017 guidance is as follows. RevPAR growth of 1% to 2%, an increase of 150 basis points at the midpoint, adjusted EBITDA of $245 million to $253 million, an increase of $6.5 million at the bottom-end and an increase of $4 million at the midpoint. And adjusted FFO per share of $0.97 to $1.01. The primary drivers of our guidance raise includes the following. One, that Business Transient has performed above expectations with year-to-date RevPAR growth of over 5% versus our original guidance expectation of slightly negative. We expect Business Transient to moderate during the second half of the year but remain positive. Two, Group pickup started the year ahead of our expectations, but has recently slowed. Our guidance assumes that short-term Group booking trends remain challenging particularly in the third quarter, which will be impacted by the timing of independent stay and the Jewish holidays. Three, our New York portfolio led by the Lexington has performed better than our original expectation of negative 3.5% to 4.5% RevPAR change. In fact, year-to-date, our New York City hotels have generated positive RevPAR growth. However, in light of this supply, we are taking a cautious view on the New York market and the midpoint of our revised guidance assumes RevPAR contraction of 3% at our New York City hotels for the back half of the year. Finally, we expect our hotels in South Florida and San Francisco to perform – underperform for the balance of 2017 for market-specific reasons. For the balance of our markets, we expect the general operating environment to reflect stable operating trends and slow but positive economic growth. Let me wrap up the prepared remarks by reiterating that DiamondRock remains focused on being prudent allocators of capital and best-in-class asset managers. With our high-quality portfolio, and over $350 million of investment capacity, we feel well prepared to take advantage of opportunities that may come our way. We would now be happy to take your questions. Operator?

[Operator Instructions] Our first question or comment comes from the line of Smedes Rose from Citi. Your line is open.

Hi, thanks. I guess, I wanted to ask you first, have you seen any change in booking patterns for Groups for 2018, are there positive or negative?

Sure, Smedes, this is Sean. Our 2018 bookings were actually down compared to what was booked prior year. So we are still positive on 2018 pace. But in certain markets, it was down. Chicago was probably the leading market that was down. Now a caveat that by the fact that pace is still up strongly in Chicago. So a lot of that business was booked well in advance and so the quarter-on-quarter comparisons look worse than they are in reality. But, we have seen softness in the quarter for 2018 bookings.

Okay, thanks. And then I guess, you’ve highlighted improvement at the Lexington in New York and I was just wondering if there is anything in particular there that you are doing at that property that’s helping results?

Sure, Smedes, this is Mark. So, at the Lex, we’ve instituted a new asset management initiative on the revenue side. So we are taking a kind of a more defensive posture on the revenue management and I think that’s making a big difference. We’ve actually positioned the asset manager to work out of that hotel three days a week. So, we are working much closer with the operator there kind of intensely evaluating the revenues and some strategies. So I think that’s playing out. We are also optimistic that as we go forward the Marriott’s new cancelation policies will have an impact on some of the short-term wash at the hotel. So that may be playing into it as well.

All right, thank you very much.

Thank you. Our next question or comment comes from the line of Jeff Donnelly from Wells Fargo. Your line is open.

Good morning, guys. Mark, I recognize DiamondRock already has a very strong balance sheet, but if you guys feel like you are losing out on deals in the marketplace by 10% or 15%, how do you guys feel about exploring additional sales from your portfolio, particularly do you fund any kind of off-market acquisitions?

Yes, Jeff, it’s a great question. I think our perspective is, we have 28 hotels and we generally really like our 28 hotels. So there is – unlike I think, three years ago, when we had what we considered a couple of non-strategic assets, felt really good about the existing portfolio. I think we would want to deploy some of our best-in-class before we mined additional disposition opportunities. We have had some reverse enquiries on some assets. So, of course, everything is for sale for the right price. But right now, the proactively built capacity one way to think of opportunity set for cost of capital is relatively limited. I think we’d rather deploy at least one more acquisition before we proactively looked at selling assets.

And maybe this one is for a couple people on the team, but you guys have had a good portion of your rooms completing renovations in the first half of 2017 and Chicago is going to continue into 2018. But, can you talk about just some of the EBITDA disruption that occurred from these renovations? Whether that was in for the late 2016 to this early 2017 period? And I guess, what I am asking is, how should we think about some of that coming back in the numbers of either later this year, as we begin to comp that period or early teen?

Yes, Jeff, when you look at 2017 and the back we had a couple million dollars of renovation disruption in the first half of the year which will be more than made up for the tailwinds from Worthington disruption which was in the second half of 2016. And so, net-net, our view on disruption for 2017 was that the two are going to wash. So, for the first half of 2018, assuming we don’t do anymore renovations which probably is not a very good assumption, but you would expect that couple million of dollars of disruption to come back in the first half of 2018. But with any portfolio, you should expect some level of renovation disruption that’s inherent within renovating hotels, we did six of them in the first half of this year which obviously was a lot. I think that volume will be less next year than this year, but it’s not material numbers.

And do you expect The Inn at Key West to be sort of an early to maybe mid-2018 renovation?

That’s probably summer time is probably the best time to do that. So, I would tell you that’s probably summer time 2018 would be our best guess. But we are still working through our plan there.

Okay. And just one last one, you are talking about some areas for cost savings. Are the opportunities to save on labor more to do with for example, outsourcing or are these maybe somewhat brand-driven initiatives such as technology that allows you to be more efficient with staffing levels?

I think it’s more about labor based – labor management system is measuring productivity, looking at FTEs, trying to be more efficient, seeing where we could complex and combine positions. It’s kind of – as I said in the past, we’ve done a really good job here of managing cost and it’s just newly – and it’s small wins here and there at each of the additional properties.

Great, great. Thanks, guys.

Thank you. Our next question or comment comes from the line of Anthony Powell from Barclays. Your line is open.

Hi, good morning guys. You mentioned about your Business Transient revenues were up 5.6 in the quarter. That’s clearly a different story than most of the other lodging companies’ reports so far. Given your market set, better business, stable demand and a national average to the hotels maybe share more color on that will be great.

Sure, Anthony, this is Mark. I’ll just lead off. We have 28 hotels, so I am not sure what happens in our portfolio is indicative of what’s going on nationally. Yes, our markets – I think, Group was down a little bit, so we had some capacity, but generally, our markets had better Transient pace, then our expectation was at the beginning of the quarter. And so, I think our markets were in a little better position to take advantage of some of the transient trends that were occurring. Sean, do you have anything to add to that?

No, Mark, that is spot on. I think, when you look at where our Business Transient is, and we have particular strength in markets like Boston and Chicago and Frenchman’s Reef and Worthington, as well as Salt Lake City, they were market-specific items as well as some of asset management initiatives to mix shift from some leisure into Business Transient. But, I think, I think the read through for us is that it’s portfolio-specific, not national averages specific.

Got it. Similarly, in July, your RevPAR growth of 3.8% seems a good amount stronger than the SCR data. Is that, some of that Business Transient demand is spilling into July or anything else to call out there?

Yes, Anthony, we are still getting our data in on the July numbers, but we don’t have all the details right now, but our transient is better in July. Group with independent stay has always impacted a little bit in July, big one from a Monday to a Tuesday. So that had some impact, but we are very pleased with our July numbers that were ahead of our expectations. Now, the next two months are not going to be as strong as that. But it was a great way to kick off the quarter.

Anthony, the one item worth noting for July is that, this is the first month where we had the soft comps for the Worthington renovation and so our Worthington was up pretty dramatically for July and so that impacted that 3.8% close to 100 basis points.

Thank you. That’s helpful. And just one more, how does the citywide calendars look for Boston and Chicago next year?

So, I’ll take that. So, the Chicago looks better. We have a good citywide calendar every three years, Chicago tends to have a very strong citywide year. Boston, we expect generally to be similar to this year’s level. And then back to our hotels.

Got it. Thank you.

Thank you. Our next question or comment comes from the line of Rich Hightower from Evercore. Your line is open.

Hi, good morning guys.

Good morning.

So I wanted to follow-up on one of Anthony’s questions, back to the comments on Business Transient. Mark, I just wanted to get some clarification on one of the comments. So, obviously, that segment outperformed our expectations during the first half. You said in the prepared comments, it’s expected to moderate in the second half. Is that simply just a comment versus the first half being much stronger than expected or is there is something else going on in the second half that’s fundamentally different that we need to be aware of. I think, I guess, the root of the question here is, when you talk to some of the other companies, adjusting for the different holiday shifts in both halves, it seems to be sort of a steady type of number people are forecasting for the second half versus the first half. But I just want to get a little bit of clarification on what’s going on in your portfolio there?

Sure, Rich. I don’t think on a kind of national average or portfolio-specific or that different than what you are hearing on the other earnings calls which is, it’s up slightly. It’s growing, but it’s a very modest rate. I think what we trying to imply in our clarification remarks on outlook is that we don’t expect 5% plus growth for the back half of the year. It’s more slightly positive which is more consistent from what we expect on the national trends for Q3 and Q4.

Okay. Thanks for that. And then, my second question, you guys brought up supply in New York is being maybe a concern in the second half versus the first half. I think, from our perspective, we tend to think of these things on an annual basis and maybe we don’t get so much in the leads on a quarterly basis. So if you don’t mind, can you just kind of walk us through what the competitive supply picture looks like in New York for the third and the fourth quarter and just what’s driving that comment?

Yes, for the full year, we think supply is going to be over 6% for the market and probably something similar to that level maybe a little bit more in 2018 before getting dramatically better based on the data we are looking in 2019. It’s not just necessarily the hotel that opened in June that impacts your third quarter, it’s going to be the cumulative impact of a number of hotels. Clearly, we have - the bulk of our assets are located in Midtown East, that’s been – it’s been dramatically helped by the closing of the Waldorf. That will continue, that’s a 10% decrease in Midtown East supply. So, obviously that’s a benefit. But as we look t to the impact of more and more hotels opening up, exceed their expectations for the first half of the year, our view is, it continues to be challenging – continues to be difficult, while we can get the occupancy and demands there, it’s just a very difficult environment to get rate. So we want to continue to take a cautious stand. So, it’s not just because there is a hotel there blocks opening up, it’s a cumulative impact on the Island of Manhattan.

All right. Great, thanks.

Thank you. Our next question or comment comes from the line of Ryan Meliker from Canaccord Genuity. Your line is open.

Hey, good morning guys. Just a follow-up on – one of other questions earlier related to New York. So it sounded like you guys materially executed the market’s performance in the first half of the year, exceeding your expectations for the first half of the year, but when we look out to the back half of the year, you are assuming continued – you are continuing to assume some challenges and softness in the market. Just talk about how to understand that dynamic. Is there anything that’s different in the back half of the year or in the front half of the year that would limit your ability to continue to outperform the market or is this just kind of a view where you think that’s going to be able to – continuing to be conservative in terms of your expectations in Manhattan?

Ryan, it’s a good question and our guidance is building in a negative 3.5 to 4.5 RevPAR change expectation for New York City. Obviously, we are positive for the first half of the year and we are now building into the midpoint of the guidance negative 3% which is more consistent with our original expectations. There is risk in September with the Jewish holidays. There is risk about U&G must come through from in September, where while July was a little bit better than we had originally forecasted. There is risk in August. So I think, because it’s not a Group market and because it is socio term, I think the prudent thing to do is take a conservative view on the market for the balance of the year.

Now that’s helpful and that makes sense. I just want to make sure looking anything specific that you were seeing that how it could be less optimistic in the back half than the front half, it sounds like it’s great. Second question, and I was hoping you could add some color on Mark, big picture, you guys have put up some better than you expect to – certainly by the way expected results in the first half of the year. Just read your guidance for the back half of the year, are you feeling better about the business and about your portfolio today than you were earlier this year?

I think, we are feeling, we are not seeing huge demand growth. I think, we are feeling much better about the downside risk. So, where we had hold and where we had some real what we thought were potential downside risk, I feel like they are off the table now. So I think we are feeling very good about the firmness at the bottom-end of our forecast. We are still not feeling that demand is growing great and Business Transient on fire. But I think the improvement in our sentiment really is that, things are still very stable at our hotels unlike this time a year ago, where we saw some negative trends. The general trends are stable today.

And Ryan, what I want to add to that is, our geographic footprint, our view on our geographic footprint relative outperformance feels better today than it would have at the beginning of the year. The biggest driver of that is really two-fold. Our New York City has performed better than we expected which was the one sort of market that we were cautious on within our portfolio and the troubled markets throughout the country where we don’t have a lot of concentration in San Francisco, Houston and Miami obviously have struggled in the first half of the year. And so, when you put those two things together on a relative basis, we feel good about our positioning.

And along those lines, I guess, the Group dynamics that you guys highlighted both concerned you too much in terms of the 3Q and 4Q bookings last quarter being soft and bookings in the 2018 being a little soft last quarter?

No, because we baked that into our original guidance. As you recall, when we gave the original guidance, we assume that in the year, for the year bookings was going to be down about 10%. When you look at what was booked in the second quarter, it was down about 10% for the quarters two through four for 2017. And so, it’s kind of tracking in line. So when you look at the drivers of our cadence of guidance, the one thing that didn’t change was our outlook for short-term Group bookings.

Great. That’s helpful. That’s all for me. Thanks.

Thanks, Ryan.

Thank you. Our next question or comment comes from the line of Bill Crow from Raymond James. Your line is open.

Great, thanks. Good morning. Let’s start with the resort exposure and ROA cycle. Can you just talk about the trade-off maybe between flexibility of margins and operating costs versus maybe stickier demand throughout the cycle?

Yes, Bill. So, as we mentioned last six deals have been resorts of about 25% resorts overall in the portfolio. We really like and I articulate two reasons on the call, but there is actually a couple more. One is, we think of resorting experience for travel is a kind of a paradigm shift of what travelers want more and more and that will continue over the next decade. Also, as we get through the cycle, we are more and more concerned about supply in the markets and you look at the continuum of the supply and what’s coming and approved in some of these markets like Seattle or Portland, they are very concerning numbers. Even though there is good demand, it’s hard to underwrite those deals. It’s easier in these resort markets. I mean, if you look at Sedona, right, where we did our last two deals, there has been one hotel built in the last 12 years and there is no hotels under construction. Key West has had two hotels in the last decade. Huntington Beach has had two hotels in the last 13 years. Those are things that make it easier to underwrite and we think it’s less risky allocation especially late cycle. While there are price pressures, many of these markets are non-union. Many of these markets have multiple levers where asset management can really make a difference because they are more complicated assets. So there is more ability to find efficiencies and to reinvent restaurants and create new F&B experience, if there is more ways to add revenues to them. So, we are generally very bullish on resorts right now.

Mark, that’s helpful. And talk about the guest mix at the resorts, is there an opportunity to go more international and have you seen any reaction to the lower – the weaker dollar?

Great question. So, our resorts generally aren’t International. We don’t have a lot of International. So International probably represents in our portfolio 8% that’s been relatively stable, within the portfolio. So what we have seen is some shift of where that International demand is coming. In New York we have traded out some International for other kind of equally rated business. But our resorts generally when you think about Sonoma or Huntington Beach or Key West, even Fort Lauderdale there are more domestic resort travelers that are coming to our properties. So we wouldn’t expect to benefit or be hurt by the change of dollar at the resort exposure. Really, New York is probably the one market that will fluctuate the most and we’ve been encouraged year-to-date that we’ve been able to replace any lost International with kind of equally rated domestic travel. So, I think that’s a benefit.

Finally, from me, you accreted all, looking at Houston as a market for potential value-add acquisition or is that just too hard to underwrite at this point?

Yes, we like to be contrary and see if we can create value. I think Houston, Houston is difficult. It’s a single demand generated kind of market and we’ve always had kind of reluctant to go to that market. I think the one we are more intrigued is San Francisco and trying to find something – try to bottom picked out over the next 12 months and get into that market. We will be a contrarian player right now in a kind of a difficult market that’s probably the one we’ve been, we looked very closely earlier and show long-term study in Miami and frankly we are –except for the beach, we are concerning the downtown there is kind of a multiple year of problem there. So, probably not looking to get into downtown Miami anytime soon, but of those three troubled markets, San Francisco is the one where we are spending most of the time.

Great. Thanks for the time. Appreciated.

Thanks, Bill.

Thank you. Our next question or comment comes from the line of [Indiscernible] your line is open.

Great. Thanks guys. A question for you on your resort exposure of 25% with a potential other acquisition in that segment. Do you have a target for your resort EBITDA exposure for the company?

Yes, when we talk to the Board, we talk about long-term strategies somewhere between 25% and 33% is kind of the range we’d like to be in. That’s going to – with 28 assets or 30 assets, it’s going to be a little bit junky. But 25 feels very good. My guess is, early cycle, next cycle, we’ll probably do more urban and probably for the balance of this cycle probably continue to focus a lot of energy on resorts.

Great. Thanks, the other question I had is, maybe if you can comment on the recent loss of two asset managers and what you are doing to replace them or how you are running that process?

Sure, so we are fully staffed – I am not sure we are exactly, but we are fully staffed. Obviously, Tom Healey came on as our Chief Operating Officer at the beginning of the year. He has five VPs of asset management, many of them have long-term relationships with him. He brought in two of those when he came on board and the team is fully assembled and I think the results speak for themselves year-to-date.

Great. Thanks guys.

You got it.

Thank you. Our next question or comment comes from the line of Stephen Grambling from Goldman Sachs. Your line is open.

Hi, this is actually Rebecca Stone on for Stephen Grambling. I was wondering if you could comment on cancelations in the quarter or trends you are seeing and expectations from some of the new cancelation policies that have been coming up?

Sure, so, I’ll take that. So our attrition/cancelation is up year-to-date, but it’s a relatively small number. So, when we talked to our operators, what they are seeing on a broader basis is some tick up, but it’s not a concerning level. They aren’t foreseeing more of the cancelation policies on Groups, which probably makes those numbers a little better versus – kind of I would say, more stable upswings will allow people to rebook – you want to cancel in November, you can – next year, they are more stringent and trying to collect more of the attrition fees. So we are seeing attrition fees kick up with 28 hotels, a couple hotels can move our overall numbers. I think we are very encouraged by on the transient side, on the new cancelation policies enacted by both Marriott and Hilton. We applaud them for making that change. So, we will see how that actual impact plays out in our major markets. New York would clearly be the one that would be the biggest beneficiary, because that’s the one that has the short-term wash. So we’re looking closely at that.

Okay, great. And thanks. And then, on the Group revenue front for the rest of 2017, I think your comment was that it was slightly positive in 3Q and flat during 4Q. We’ve been hearing that maybe 4Q would be a little bit relatively better compared to 3Q. What exactly is driving that sort of flat Group growth as of now? Thanks.

Yes, I mean, when – Rebecca, when you look at our portfolio, obviously we are going to defer the national average, so it’s 28 assets. Chicago and Boston are big drivers of our overall Group numbers. So it’s really our market exposure more than what’s happening on the national trends that are impacting our Group pace numbers for the balance of the year and the split between those two quarters.

Thanks.

Thank you. Our next question or comment comes from the line of Chris Woronka from Deutsche Bank. Your line is open.

Hey, good morning guys. One of the trends we’ve been seeing in the – I guess, in the broader STR data more so from the top 25 markets is an uptick in contract business. It looks like the rates on that are up pretty nicely. But obviously, they are well below the Group and Transient. The question is, are you guys seeing that in your portfolio? And if you are, is it more indicative of softness in Group or Corporate Transient or both?

Yes, so, it depends on the market. What we have seen in kind of the mix shift is, it’s a defensive strategy to layer an airline crew and other contract business try to make sure you have that base and then be able to push on those statements. Frankly, we employ that strategy more vigorously in 2016 and 2017. And some of our hotels were actually trying to take the opposite, but it really is market-by-market. I think why you are seeing the increasing in contract and others, people are taking less risk and being more defensive. You got to be careful to balance that and that we look at every asset, it’s kind of in every market on a very individualistic manner trying to figure out how we maximize the revenue there. So, some of our hotels if you want individually the contracts up so there are some we’ve taken it down. But last year, you would have really seen our numbers, an increase in contract and other as we kind of took the most defensive strategy possible as things were softening in 2016. I think in 2017, we are trying to become more balanced perspective and that’s one of the reasons probably our RevPAR is a little better than some of our peers this quarter as these strategies have played out generally pretty well.

Okay, that’s great. And then, one New York question for you. I think we are expecting a few more – I guess, call them four star soft brands pop up over the next couple quarters. Do you guys view that as good in the sense that it can lift the rate in a given kind of neighborhood or do you think it’s bad, because maybe it’s more direct competition for same customer?

That’s a great question. I think, on average, the unbranded hotels, especially, the larger unbranded hotels have lower rates than the branded hotels. So, to the extent they can get stronger channels, it helps lift the rate and rate is the issue on New York City. So, the more things – the more especially the larger hotels that are branded probably the better it is for the market and better it is for price integrity. Yes, within a brand family, we own the Marriott autograph at Lexington in 48 having a new Marriott or another Marriott soft brand, three blocks away isn’t – it splits some of the customer base. But a lot of these hotels aren’t new hotels that are getting converted to soft brands or existing supply and frankly the better the rate integrity, probably the better it is for our hotel.

Okay, very good. Thanks, Mark.

Thank you. I am showing no additional questions in the queue at this time. I’d like to turn the conference back over to management for any closing remarks.

Thank you, Howard. To everyone on this call, we appreciate your continued interest in DiamondRock and look forward to updating you next with our third quarter results. Have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.